The 2016 federal budget builds on the favourable tax cuts for small businesses in last year’s budget and confirms a number of measures announced in the government’s innovation statement released earlier this year. We have outlined these measures below as well as  some practical advice about how to take advantage of them.

It is important to keep in mind that these measures are not yet law and given that we are headed for an election in July, a change in government could see some of these measures fail to be enacted.

Contents

  1. Small business entity threshold jumps to $10m
  2. Change in the company tax rate
  3. Discount on tax payable by other business entities (not companies)
  4. Immediate deduction for assets worth $20,000 or less (excluding GST)
  5. Personal tax cuts for middle income earners
  6. GST will apply to all imported consumer goods

1. Small business entity threshold jumps to $10m

In a significant win for business, the small business entity turnover threshold will increase from $2 million to $10 million from 1 July 2016.

What you need to know

The reform will give a greater number of businesses access to a range of tax concessions such as:

  • The lower small business corporate tax rate (explained further in this article);
  • Simplified depreciation rules including an immediate write-off for assets costing less than $20,000 that are acquired by 30 June 2017 and depreciation pooling provisions;
  • Simplified trading stock rules;
  • A different method of calculating PAYG instalments;
  • The option of accounting for GST on a cash basis;
  • FBT exemptions (this would start from 1 April 2017); and
  • A trial system of using a simpler business activity statement.
  • The current $2 million turnover threshold will be retained for access to the small business CGT concessions and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million.

2. Change in company tax rate

What you need to know

  • Last year saw the introduction of a company tax rate of 28.5% for companies with revenue of less than $2m effective for the financial year ended 30 June 2016. This year’s budget lays out a plan to reduce the company tax rate for all companies to 25% over the next 10 years.
  • The reduction will initially target companies with a turnover less than $10 million, then gradually increase.
  • Companies with a turnover of $10m or less will pay 27.5% tax for the year ended 30 June 2017 with the revenue threshold increasing over the next few years.
  • Companies with PAYG instalments will benefit from their first payment after 1 July 2016.

Things to consider

  • Whilst you should never make a decision to curb your businesses growth for the sake of paying less tax, there may be merit in giving some attention to your revenue position next year if you are close to the $10m threshold. The option to delay invoicing or the receipt of payments could be considered to sneak under the threshold and therefore receive the benefit of the reduced rate of tax.
  • As part of tax planning for the year ended 30 June 2017 you should consider where tax is being paid. The reduction in the corporate tax rate lowers the point where leaving profits in a company is advantageous as opposed to paying them to an individual.

As part of the tax planning service included in our Business Essentials Plans we will work closely with our clients to ensure the best outcome is achieved based on their position.

3. Discount on tax payable by other business entities (not companies)

What you need to know

  • The government is looking to increase the discount applied to tax paid by business entities that are not companies (i.e. sole traders, trusts and partnerships).
  • Starting from next year (ended 30 June 2016) a discount of 8% will apply. From 2024 this will begin increasing to 16%.
  • The revenue threshold for access to the discount will also increase from $2m to $5m.

Things to consider

  • Like our guidance on companies, it will be worthwhile paying attention to your revenue position if it is close to the $5m threshold. We will help our clients assess this during tax planning for 2016.
  • The discount will be capped at $1,000 per individual for each income year, and delivered as a tax offset. As such, small business operators will need to carefully assess whether to incorporate or not. Feel free to contact us to discuss if restructuring is appropriate you.

4. Immediate deduction for assets worth less than $20,000 (excluding GST)

This measure was introduced in the 2016 financial year, however now that the small business revenue threshold has increased to $10m, a number of extra businesses will be able to take advantage of this measure.

What you need to know

  • The $20,000 threshold will apply to assets acquired and installed ready for use before 30 June 2017.
  • Businesses that are currently over $2m in turnover but under $10m will only be able to take advantage of this measure for assets purchased between 1 July 2016 and 30 June 2017.
  • From 1 July 2017, the threshold reverts back to the existing $1,000 amount.
  • Your general pool balance can be immediately deducted if the balance falls below $20,000 before 30 June 2017 (including existing pools).
  • The Government will also suspend the current “lock out” laws for the simplified depreciation rules, also known as asset pooling (these prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt out), until 30 June 2017.

If you are unsure of how you are currently depreciating your assets, rest assured that as part of a mi-fi Business Essentials Plan, we will do the necessary calculations to ensure you use the method that results in the best outcome for you.

Things to consider

  • Don’t buy things you don’t need! – Beware of businesses advertising the increased threshold as a means to justify buying things you don’t need. Spending to receive a tax deduction isn’t a wise decision. Would you pay $1 for every 30 cents you received? Unlikely, and this is effectively what you are doing if purchasing items you don’t need just to get a tax deduction. First and foremost make the decision to purchase an asset on the basis that it will derive more income for your business. The tax deduction should be seen as a secondary benefit.
  • Timing of planned asset purchases – If you were considering the purchase of a new car, piece of machinery or other important business asset then you may want to consider bringing forward that purchase (cash flow permitting) prior to 30 June 2016 in order to receive the deduction this financial year. At the very least, make sure that you consider any planned asset purchases prior to 30 June 2017 when the threshold reverts back to $1,000.
  • If you are a business that uses the Uniform Capital Allowances regime (not pooling) to depreciate your assets but are currently eligible for the small business concessions, you may wish to consider re-entering the simplified depreciation regime before 30 June 2017.

5. Personal tax cuts for middle income earners

The 32.5% personal income tax threshold will increase from $80,000 to $87,000 from 1 July 2016. The new tax rates from 1 July 2016 would be as follows:

Taxable incomeTax rate from 1 July 2016
$0 – $18,2000%
$18,201 – $37,00019%
$37,001 – $87,00032.5%
$87,001 – $180,00037%
$180,001 and over45%

What you need to know

If your personal taxable income is over $87,000 you will pay $315 less in income tax.

Things to consider

As part of your tax planning you should consider how profits in your business are taxed. This will depend on your business structure. If you are a sole trader, the tax cut will automatically be received, but businesses with other structures should seek professional tax planning advice in relation to this.

6. GST will apply to all imported consumer goods

Currently, the GST system provides an exemption for goods that are imported into Australia with a value of less than $1,000. This exemption will be removed so that GST can apply to all goods imported by consumers from 1 July 2017. In effect, all goods imported by consumers will face the same tax regime as goods that are purchased in Australia.

What you need to know

Overseas suppliers that have an Australian turnover of $75,000 or more will be required to register for, collect and remit GST for all goods supplied to consumers in Australia (regardless of their value), using a vendor registration model.

While this is unlikely to have a direct impact on Australian businesses importing goods from overseas, this should at least level the playing field so that foreign suppliers will need to factor in GST obligations when selling goods to Australian customers.

Things to consider

Whilst the exact details of the regime for collecting GST on imported goods is yet to be advised, the ‘Vendor Registration Model’ would require overseas businesses to register for GST if they have a turnover in excess of $75,000 and collect GST on sales they make in Australia.

Remember that GST is tax on the consumer not businesses. Under the new regime, it is expected that you will quote your ABN to the international vendor and the they will simply not charge GST.  Unlike the situation where you buy from an Australian business and then claim any GST back on your BAS. In either scenario, the amount you end up paying for the international goods will remain the same.

We will advise clients on a Business Essentials Plans of any change to their obligations and update our BAS lodgement and review processes as part of our service to you.

How we can help

We appreciate that some measures may not be straightforward and encourage you to contact us if you require further explanation of how they relate to your specific situation. Many of these measure will require changes to your tax planning arrangements to ensure that you are receiving the maximum benefit.

For those clients with a Business Essentials Plan that includes tax planning we will be taking these changes into account as part of your customised tax plan for 2016 and subsequent year.